Shelter Partnership Inc

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INTRODUCTION About Shelter Partnership, Inc The case is about cost allocation accounting concerns in a non-profit corporation “Shelter Partnership, Inc”. The following summaries the key activities undertaken by Shelter and the way these different activities contribute towards the achievement of Shelter’s objective. Approach Before we dive into the case analysis, we would like to first discuss the relevant topic, which we see as the issue of cost accounting in a non-profit organization (“NPO”), to lay the foundation for the analysis of the case subsequently. (A) DISCUSSION OF THE RELEVANT TOPIC – A LITERATURE REVIEW It would be appropriate to develop some background knowledge about the limitation of financial statements of NPOs, support cost, allocation of cost and its importance. (I) Limitation of Financial statements of the nonprofit organizations: Subjectivity in Interpretation of the Financial Statements of the nonprofit organizations. It is important to remember that financial information for nonprofits is interpreted differently from for-profit financial statements. The following is quoted from What a Difference Nonprofits Make: A Guide to Accounting Procedures, 1990, Accountants for the Public Interest: “ Meaningful evaluations and comparisons of nonprofit performance almost always prove difficult and complex. While the profitability of two businesses can easily be calculated, it is much harder to compare the effectiveness of two counseling centers to see which is doing a better job of helping the mentally ill. Without the standard of profitability, it is also difficult to compare the job performance of nonprofit staff and managers.

Since the beneficiaries of nonprofits often cannot afford to pay for services, organizations frequently lose money on every sale. As a result, an increase in the number of clients or customers may paradoxically increase the likelihood of a financial crisis. On the other hand, turning a profit may mean that a nonprofit agency has turned away clients, perhaps including the most needy. To determine a nonprofit's success you must refer to its goals: these are the group's self-determined replacement for the bottom line of profit-making. The board can measure [a nonprofit's] success by comparing the results achieved with the results sought. ” Joint cost allocation: Joint costs allocation is unfortunately an area where NPOs sometimes use questionable financial practices, such as arbitrarily dividing up and spreading most or all of their actual fundraising and/or operations costs in their financial reports among their various program services in order to make it appear that they have very low fundraising and overhead costs. That contrasts with legitimate accounting procedures for accurately assigning a particular program service (or fund or grant) its true share of the operations and overhead costs. Support Costs {text:bookmark-start} In undertaking any activity there may be support costs incurred that, whilst necessary to deliver an activity, do not themselves produce or constitute the output of the NPO’s activity. Similarly, costs will be incurred in supporting income generation activities such as fundraising, and in supporting the governance of the NPO. Support costs include the central or regional office functions such as key and general management, payroll administration, budgeting and accounting, information technology, human resources, and financing. Key management personnel (for example, the board of directors and the chief executive officer) are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. Support costs do not, in themselves, constitute an activity, instead they enable output-creating activities to be undertaken. Support costs are therefore allocated to the relevant activity cost category they...
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